Non-Compete Agreements May Stifle Competition; Businesses Argue to the Contrary, They Protect Trade Secrets and Investment

Non-compete clauses have been included in employee contracts for decades now. These provisions ensure that employees do not walk off with valuable trade secrets or client lists and take them to a competitor. Putting such a clause in employee contracts makes sense, but only up to a point. A standards noncompete contract will prohibit an employee from working for a competitor within a certain geographical radius for a specified period of time. Six months to a year is pretty standard, but that time limit has been growing lately.

Non-compete agreements were first used largely by technology companies who need to guard their developments very closely. If an employee left to work for a competitor and took everything they knew about their former employer with them, the new employer would have an unfair competitive advantage. It therefore makes sense that companies would try to protect their business interests by preventing employees from going directly to work for a competitor.

The problem that employees have been facing lately is that non-compete agreements have spread beyond just those working in tech and sales. Now, everyone from camp counselors to hair stylists are being required to sign non-compete clauses. Hourly workers in these kinds of positions cannot afford to give up a year or two of work to wait for their non-compete agreement to expire and they have started to speak out against the restrictions that their employers are placing on them.

California and North Dakota already ban non-compete agreements. Now it looks like Massachusetts may be joining their ranks. Governor Deval Patrick has proposed legislation banning noncompete agreements except in a few situations. A committee in the Massachusetts House has already passed a bill incorporating the governor’s proposals, but the new law isn’t in the clear yet and supports and opponents of the bill are fighting furiously over the new measures it would impose.

Paul Maeder, co-founder and general partner of Highland Capital Partners, argues that “Noncompetes are a dampener of innovation and economic development. … They result in a lot of stillbirths of entrepreneurship.”

State Representative Lori Ehrlich, one of the main sponsors of the new legislation and vice chairwoman of the Joint Committee on Labor and Workforce Development, has argued that noncompetes “are hurting growth in the economy by decreasing worker mobility and squelching start-ups. … They’re hurting families making it so people are unable to work for an extended period of time. This has increasingly become exploitative to workers.”

Matthew Marx, a professor of entrepreneurship at the M.I.T. Sloan School of Management, has also spoken out against non-compete clauses. “When noncompetes are not enforced, there’s a more open labor market – companies compete for talent.” He said that California’s ban on non-competes are actually a major reason why Silicon Valley is thriving. If a few employees have an idea, but their company doesn’t want to pursue it, they’re free to leave and start their own company. In most other states, though, those employees would be stuck with their current employer, unable to found a competing company.

The business litigation attorneys at DiTommaso Lubin Austermuehle near Chicago and Oak Brook represent business owners and professionals regarding non-competition agreements, covenants not to compete, restrictive covenants and other claims throughout the Chicagoland area, including Cook, DuPage, Lake, Kane, McHenry and Will Counties; and in the Mid-West region, including Indiana, Wisconsin and Iowa. You can contact us by calling our toll free number (877) 990-4990 for a consultation or contact us online by filling out the form at the side of this blog.